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2015 (8) TMI 656 - ITAT HYDERABAD

2015 (8) TMI 656 - ITAT HYDERABAD - TMI - Transfer pricing adjustment - selection of certain comparables in ITeS segment - Held that:- In case of M/s. Capital IQ Information Systems (India) Pvt. Ltd vs. Addl. CIT [2014 (9) TMI 125 - ITAT HYDERABAD] all these companies were found to be incomparable to a pure ITES provider (1) Infosys B P O Ltd because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. (2) Genesys International Ltd b .....

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Cosmic Global Ltd. because total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at ₹ 27.76 lacs. (5) Acropetal Technologies Ltd. (Seg.) company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system.allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary event .....

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quired a company. Further, it is clear that company has made losses and it is not clear whether loss is on account of acquisition or not - we do not consider it appropriate to accept this company as a comparable.

Non aggregating the software services transactions of the assessee for determining the ALP - Held that:- It is apparent from the facts and materials on record, even after merger of Spacelabs with Rapiscan Systems India Ltd, maintenance of accounts is entity specific. Though, .....

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vices are for two different sectors i.e. security system as well as medical services, we are not able to accept assessee’s contention that operating profit to operating cost of the revenue earned from software development services segment should be considered as a whole for computing the margin of the assessee. Moreover, when assessee has maintained entity specific a/c with segmental details and has also conducted analysis on this basis in its TP study, we do not find any reasons to disturb the .....

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Solutions Ltd - As relevant informations required for coming to a definite conclusion are not before us, we are inclined to remit the issue of comparability of this company to AO/TPO for considering afresh. Further, we may observe that in case of Triology E Business (2011 (6) TMI 392 - ITAT BANGALORE ) this company has been excluded on the basis of high turnover. Therefore, this aspect is also required to be examined by AO/TPO while deciding comparability of this company.

CG-VAK Softw .....

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f the view that this issue needs to be looked into afresh by the TPO, in view of the assessee’s claim that the foreign exchange earning of the company is more than 92%. TPO must examine assessee’s claim with reference to the facts and materials on record and decide the issue with a reasoned order after giving opportunity of being heard to the assessee.

Non consideration of provision for bad and doubtful debts while computing the net margin of comparable companies under TNMM - Held tha .....

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y assigning valid reasons after reasonable opportunity of being heard to assessee.

Rejection of resale price method (RPM) selected by the assessee for determining the ALP of the international transactions of purchase of medical equipment for distribution - Held that:- after considering a number of decisions on the very same issue from different Benches of the ITAT, it was held that in case of transactions related to purchase and sale of goods, RPM is the most appropriate method. The p .....

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o adoption of TNMM in the impugned assessment year. In view of the aforesaid, we remit the matter back to the file of the AO/TPO to examine assessee’s analysis under the RPM and decide the issue accordingly after due opportunity of being heard to the assessee.

Exclusion of communication and insurance expenses from total turnover particularly in absence of definition of the term total turnover under the provisions of section 10A/ 10B - Held that:- This issue is no more res integra in v .....

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nch in the case of Income Tax Officer vs. Sak Soft India Ltd (2009 (3) TMI 243 - ITAT MADRAS-D). - Decided against revenue. - ITA No. 683/Hyd/2014, ITA No.542/Hyd/2014 - Dated:- 12-8-2015 - Shri B. Ramakotaiah and Shri Saktijit Dey, JJ. For The Assessee : Shri Ajit Tolani, For The Revenue : Shri T. Venkata Reddy, CIT(DR) ORDER Per Saktijit Dey, J.M. These cross appeals by the assessee and the Department are against the final assessment order dated 27.01.2014 passed by the DCIT, Circle 16(3) Hyde .....

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hcare Solutions Pvt. Ltd (in short Spacelabs) and OSI Optoelectronics Pvt Ltd (in short OSI Opto) were merged with Rapiscan India from 1.4.2008 and consequent to such merger, the name of the assessee was changed to OSI Systems (P) Ltd. It is also pertinent to mention here that as per the order of merger of the Hon ble Andhra Pradesh High Court, the companies had maintained separate books of accounts for financial year 2008-09. As could be seen from the materials on record, Rapiscan Systems (P) L .....

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ook profit of ₹ 15,61,69,200 u/s 115JB. During the assessment proceedings, AO noticing that assessee has entered into international transactions with its overseas AE made a reference to the Transfer Pricing Officer (TPO) u/s 92CA1) of the Act for determining ALP of the international transactions between assessee and the AE. In course of proceedings before him, TPO called for various informations from assessee in support of the Arms Length margin of the price charged by it to its AE. On exa .....

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labs provides software services in the field of medical equipment and services to its AE. The financial results of Rapiscan India for the financial year under consideration as per the audit report are as under: Particulars Software Development Services Operating Revenue/Income Rs.8,65,09,529 Operating Expenses/Cost Rs.5,48,49,312 Operating Profit Rs.3,16,60,217 OP on Cost 57.72% 4. On verification of TP study submitted by assessee, TPO found that for benchmarking the price charged by Rapiscan I .....

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ain filters, however, ultimately when he found that the margin declared by the assessee is above the margin of comparable companies, the margin shown was accepted. 5. As far as OSI Opto is concerned, AO on perusal of the TP study and 3CEB report noticed that financial results for the year under consideration as under: Description Amount Operating Revenue Rs.1,47,13,079 Operating Cost Rs.1,31,06,056 Operating Profit ₹ 16,07,023 Operating Profit to Operating Cost 12.26% 6. He further noticed .....

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however, he did not accept TP documentation of the assessee on the ITES segment by pointing out various defects and deficiencies. After rejecting the TP documentation, AO undertook a search himself in the databases which yielded 12 comparable companies with average arithmetic mean of 27.42%. The details of the companies selected by the TPO are as under: S.No Company Name Total Operating Income (Rs.) PBIT/Cost (%) 1 Accentia Tech 78,73,29,230 49.40 2 Acropetal Technologies Ltd (Seg.) 33,13,47,12 .....

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the aforesaid arithmetic mean PLI to operating cost of ₹ 1,29,92,808, the ALP of the ITES segment was determined at ₹ 1,65,55,436. The resultant shortfall of ₹ 18,42,357 was treated as adjustment to be made u/s 92CA of the Act. 8. As far as software development services provided by Space Labs is concerned, from the TP study TPO found that for benchmarking the price charged assessee has undertaken an analysis by adopting TNMM as most appropriate method and OP/OC as the PLI. Afte .....

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panies as comparables with average arithmetic mean PLI of 22.03%. The details of comparables selected by TPO are as under: S.No Company Name OP/OC 1 Akshay Software Technologies Ltd 12.41 2 Bodhtree Consulting Ltd 68.43 3 Comp-U-Learn Tech India Ltd 28.00 4 Igate Global Solutions Ltd 21.97 5 Infosys Ltd 41.34 6 KALS Inf. Systems (seg.) 23.11 7 LGS Global 20.51 8 Mindtree Ltd (Seg) 5.56 9 Neilsoft Ltd 9.05 10 Persistent Sys 18.49 11 R S Software (India) Ltd 9.99 12 R Systems International Ltd (se .....

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lowing the re-sale price method(RPM), but AO rejecting the same proceeded to determine the ALP by applying the TNNM Method, as a result of which the arm s length operating revenue was determined by the TPO at ₹ 5,26,24,777 as against the actual operating cost of ₹ 7,07,71,770. The difference of ₹ 1,81,46,922 was treated as adjustment u/s 92CA. Thus the total TP adjustment made by TPO was to the tune of ₹ 2,85,89,750. In pursuance to the order passed by the TPO, AO propose .....

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various issues of transfer pricing adjustment as well as corporate matters. At the outset, ld AR submitted before us that Ground Nos. 1 to 5 are general in nature, hence not pressed. He also submitted that Ground Nos. 8 & 9 are academic in nature, hence would not like to press these grounds. In view of the above, Ground Nos. 1 to 5 and 8 and 9 are dismissed, as not pressed. In Ground Nos. 6 & 7, assessee has raised the issue of non consideration of provision for bad and doubtful debts i .....

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gies Ltd 13. It was submitted by the ld AR, these companies objected to by the assessee have been considered as incomparable in case of other ITES companies for various reasons by different Benches of the Tribunal including the Hyderabad Benches. The ld AR submitted if these companies are excluded, then assessee s margin would be within the average margin of the rest of the comparable companies. The ld DR however, supporting the reasonings of the TPO and the DRP submitted that the TPO having sel .....

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und to be incomparable to a pure ITES provider for the following reasons: 1) Infosys B P O Ltd. : 16. It was the contention of assessee that this BPO is a giant in its area and has brand value of Infosys Technologies limited. Assessee s main contention was that it is not functionally similar and its turnover is much more when compared to that of assessee. It was also contended that the Infosys BPO has done brand building exercise by incurring large amounts of brand building and advertisement exp .....

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nt with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee s turnover is about ₹ 129.8 crores, which as against turnover of ₹ 1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys .....

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2) Genesys International Ltd. 17. It was the contention that this company functions in two horizontals, and is having super profits. It was further submitted that this company is not only in software development but also in Geospatial Services, which are highly technical. It also involves in consulting activity. It was the contention that this company was analysed by the coordinate Bench of the Tribunal at Delhi in the case of M/s. Mercer Consulting (India) Ltd. V/s DCIT (vide order dated 6th Ju .....

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rospective clients. When we consider the nature of services provided by Genesys International Corporation Ltd., it comes to the forefront that they are providing full range of geospatial services to its customers. In simple terms, geospatial services means the services relating to the relative position of things on the earth s surface. These basically include 3D mapping, Navigation maps, Image processing, Cadastral mapping, etc. If we take into account the nature of services provided by the asse .....

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nabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite, service at Sl.No. (vi) of this Circular is Geographic Information System services and at Sl. No. (vii) is Human Resources Services. No doubt, all these fifteen .....

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s is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading G .....

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re, direct to exclude this case from the list of comparables. 17.1. On careful consideration of the matter, respectfully following the above decision of the coordinate Bench, we are also of the opinion that there is vast difference between the functions of the above company and that of assessee. This company as such, cannot be treated as comparable on FAR analysis. We therefore, direct the Assessing Officer/TPO to exclude this company. (3) Eclerx Services Ltd. 18. The objection of assessee to th .....

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ed out. Therefore, the functions of the above company are dissimilar to assessee, which is a captive service provider. On the principles laid down by the Hon ble Special Bench of the ITAT (Mumbai) in the case of Maersk Global Centres (India) Pvt. Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this com .....

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for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee s services. We therefore, direct the Assessing Officer/TPO to exclude this company. (4) Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee s TP study, it has raised objection before the TPO that th .....

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hi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- 13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find .....

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BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of ₹ 6.99 crore. If this segment of Translation is not und .....

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at ₹ 27.76 lacs. We have discussed this aspect above in the context of CG-VAK s case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at ₹ 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at ₹ 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded f .....

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so involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. I .....

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t comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company. (6) Accentia Technologies Limited. 21. This company was objected to by assessee on the reason of super profits .....

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e extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration. 21.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by .....

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exclude this comparable, from the list of comparable selected . 15. As the aforesaid decision of the Coordinate Bench is for very same A.Y and facts are materially same, moreover, as the ld DR has not brought any contrary decision to our notice, therefore, respectfully following the aforesaid decision of Coordinate Bench, we exclude these comparables in ITES segment.. 16. In Ground No.11, assessee has objected to rejection of three comparables selected by it. However, at the time of hearing, ld .....

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O is totally wrong as the export earnings of this company consist of 74.45% of its service revenue. Therefore, it satisfies the export revenue filter applied by the TPO. The ld DR on the other hand referring to the observations made by the TPO at Para 35 of his order argued that the company has made significant acquisitions during financial year 2008-09. Therefore, it is an exceptional year of operation for the company. Hence it has been rightly rejected as a comparable. 17. We have considered t .....

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mpany, however, we find that the very same Coordinate Bench while considering the comparability of this company in case of TNS India Pvt. Ltd in ITA No.604/Hyd/2014 dated 13.02.2014 after taking into account the order passed in case of M/s. Capital IQ Information systems (India ). Pvt. Ltd rejected this company by holding as under: 14. We have considered the submissions of the parties and perused the materials on record as well as the orders of revenue authorities on the issue. On a perusal of t .....

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. Though, it may be a fact that in case of Mercer Consulting India Ltd. Vs. DCIT in ITA No. 966/De./14 dated 06/06/14, which was subsequently followed in Capital IQ Information Systems (supra), the aforesaid company has been held to be a comparable, but, on a careful analysis of the decision of the Tribunal, it becomes clear that this company was held as comparable only because the Tribunal found the reason for exclusion of the company by applying the export revenue filter of 75% unacceptable. T .....

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the relevant financial year, we do not consider it appropriate to accept this company as a comparable. This ground of the assessee is therefore, dismissed. 19. In Ground No.12, assessee has challenged the decision of the TPO in not aggregating the software services transactions of the assessee for determining the ALP. The ld AR submitted before us that after the merger of Spacelabs with the assessee company, assessee has considered the revenue earned from software development services as a whol .....

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entire revenue earned from this segment should be aggregated for determining the ALP. The ld DR however, contested the claim of the assessee and submitted that even after the merger, since separate books of accounts are maintained and the nature of software development services for both the companies are different, the revenue earned from software development services cannot be aggregated for determining the ALP. 20. We have considered the submissions of the parties and perused the material on r .....

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dia Ltd, maintenance of accounts is entity specific. Though, it may be a fact that software development services is a very wide term and takes within its ambit, whole software development services, such as medical, security, banking, accountancy etc., but for comparability analysis, verticals of the software development industry have to be looked into. All types of software development services cannot be clubbed together for comparability analysis, as in our view, it will not give an appropriate .....

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in its TP study, we do not find any reasons to disturb the order of the TPO and DRP on this issue. Accordingly, having not found any merit in the submissions of the ld AR, we dismiss this ground. 21. In Ground No.13, assessee has objected to selection of following six comparables: a) Bodhtree Consulting Ltd b) Comp-U-Learn Tech India Ltd c) iGate Global Solutions Ltd d) Infosys Technologies Ltd e) Kals Information Systems Ltd and f) Tata Elxsi Ltd. 22. The ld AR submitted before us that while C .....

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Tribunal including the Hyderabad Benches, in a number of cases for the same A.Y, In support of his contentions, he relied upon the following decisions: i) Planet Online Pvt. Ltd vs. CIT (ITA No.464/Hyd/2014) ii) M/s.Kenexa Technologies Pvt Ltd vs. DCIT (ITA No.243/Hyd/2014) iii) Lam Research (India) Pvt. Ltd vs. DCIT (ITA (TP) No.1437/Bang/2014 dated 30.04.2015 23. The ld DR on the other hand supported the order of the TPO and the DRP. 24. We have considered the submissions of the parties and pe .....

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14 for A.Y 2009-10: 10.1 As far as comparables at Sl. Nos. 1 to 5 are concerned, the issues are more or less covered by decisions of the coordinate benches for the self-same AY i.e. 2009-10. In case of M/s CISCO Systems (India) Pvt. Ltd. Vs. DCIT, IT(TP) No. 130/Bang/14 dated 14/08/14, the coordinate bench after examining in detail, excluded Bodhtree consulting Ltd., Infosys Ltd., Kals Information Systems and Tata Elxsi Ltd. (Seg.) The relevant observations of the ITAT, Bangalore Bench in respec .....

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In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business o .....

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09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development s .....

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ith regard to this comparable has held as follows:- 11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned .....

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either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is .....

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; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the breakup of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. In view of the above reasons, the learn .....

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e TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee as brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy EBusiness Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year .....

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d pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not i .....

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. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No .....

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in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the f .....

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n used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Following the aforesaid dec .....

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ned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs .....

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tems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid r .....

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ith that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of P .....

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of the embedded services segment is to the tune of ₹ 230 crores in the total segment revenue of ₹ 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment s revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO. Regarding Flextronics Software Systems, the following extract from page 143 of TPO s order was read out by him as his submissions : It is very per .....

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milar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07. 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted .....

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it is seen that in case of M/s Kenexa Technologies Pvt. Ltd vs. DCIT (ITA No.243/Hyd/2014), the Coordinate Bench held as under: 39. The assessee submitted before the DRP that Comp-ULearn Tech India Ltd. was engaged in the development of new software (product development) (page 7 of the Annual Report) in ITES call centre and BPO services (page 11 of Annual Report). It was further submitted that schedule XIII of the Annual Report shows software development expenditure at only 25% of the total expe .....

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nate Bench as above, we remit this issue relating to comparability of this company to the AO/TPO with similar directions. 27. As far as iGate Global Solutions Ltd is concerned, it is seen that while considering assessee s objections against selection of this company, the Coordinate Bench in case of Planet Online Pvt Ltd (Supra) held as under: 10.8 As far as I-Gate Global Solutions Ltd. is concerned, it is the contention of ld. AR that the company is having huge turnover of more than ₹ 900 .....

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enses towards raw materials, stores and spares. Therefore, it needs to be examined in detail whether assessee s claim that the company is into product development is correct. As relevant informations required for coming to a definite conclusion are not before us, we are inclined to remit the issue of comparability of this company to AO/TPO for considering afresh. Further, we may observe that in case of Triology E Business (supra) this company has been excluded on the basis of high turnover. Ther .....

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sessee has raised objections with regard to four comparables, at the time of hearing, he confined his argument to two of the companies, CG-VAK Software Exports Ltd (Seg.) and Quintegra Solutions Ltd. Therefore, we will only consider issue relating to these two companies. The ld AR submitted before us, TPO has rejected CG-VAK Software Exports Ltd (Seg.) by observing that the company does not satisfy the employee cost filter. The ld AR submitted, the observations made by the TPO is totally wrong a .....

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that is the case, then we do not understand how the TPO can state that the company fails the employee cost filter. In view of the aforesaid, we consider it appropriate to remit the comparability of the aforesaid company to the AO/TPO for considering afresh after due opportunity of being heard to the assessee. The TPO must consider all facts and materials brought on record by the assessee while deciding the issue. As far as Quintegra Solutions Ltd is concerned, the ld AR submitted that the TPO h .....

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record. It is seen from record that while the TPO rejected this company alleging that the foreign exchange revenue earned by the company only 57% of the total revenue earned, assessee s claim is foreign exchange revenue earned by the company is more than 92% of the total revenue. In this context, the ld. AR has placed reliance on the annual report of the company as submitted in the paper book. Having considered the submissions of the parties, we are of the view that this issue needs to be looke .....

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t margin of comparable companies under TNMM. 33. Before TPO, assessee while objecting to selection of certain comparable companies also contended that the provisions for bad and doubtful debts should be considered as part of operating expenditure while computing margins of the comparable companies. TPO, however, rejected such contention of assessee by observing that provision for bad and doubtful debts can be considered as part of expenditure if such expenses are incurred every year for the last .....

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AT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: 106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would .....

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r considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly. 42. We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expense .....

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g capital adjustment. 36. At the time of hearing, ld. AR submitted before us, since assessee does not have to take much risk as far as working capital investment is concerned, necessary adjustment is to be given. He submitted, though, workings on working capital adjustment were furnished before TPO and DRP, assessee s claim has been ignored/rejected without properly appreciating them. Ld. AR submitted, in the subsequent AY, TPO himself has allowed working capital adjustment to assessee. In this .....

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to assessee. 38. The next issue which arises for consideration as per Ground No.15 is with regard to rejection of resale price method (RPM) selected by the assessee for determining the ALP of the international transactions of purchase of medical equipment for distribution. Briefly, the facts relating to this issue are, apart from providing services to its AE in software services as well as ITES segment, assessee is also engaged in distribution of medical equipments manufactured by its AE. Assess .....

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the TNNM was selected as the most appropriate method and broadly the following reasons were given by the TPO: i) The equipments sold by the taxpayer were highend, branded and technologically advanced equipments whereas the comparable companies were functioning on a much lower technological platform. ii) The difference in marketing efforts among the comparables as well as with the tax payer distort the gross margins as these margins also include the marketing effort which was inbuilt in the sale .....

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ith similarly valuable marketing intangibles. v) The tax payer had the exclusive right to resell the medical equipments in India whereas most of the comparable companies were resellers without exclusivity. Thus making adjustments for these differences becomes difficult in the case of comparables on the basis of information available in the public domain. vi) The accounting treatment of the taxpayer and the comparable companies in respect of certain direct expenses such as discount may distort th .....

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While doing so, TPO rejected one of the comparable selected by the assessee in the alternative analysis made under TNNM. The company rejected by the TPO is ASCO Industries Ltd. 41. The ld AR submitted before us that the activity of the assessee is to import medical equipments against orders placed by customers and to sell it to them without any value addition. Therefore, the most appropriate method for determining the ALP is re-sale price method as the assessee purchases the product from its AE .....

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referring to Rule 10B of the I.T. Rules submitted that when there is transaction involving purchase of a product and resale, the most appropriate method to be adopted is the resale price method. In support of his contention, ld AR relied upon the following decisions of the ITAT: i) L Oreal India P. Ltd (ITA No.1046/2012 - Bombay High Court ii) L Oreal India Pvt. Ltd. ITA No.5423/Mum/2009 iii) Kodak Polychrome Graphics (I) Pvt Ltd. ITA No. 1557/Mum/2009 iv) Danisco (India) Pvt.Ltd- ITA No.5291/D .....

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e rejection of resale price method in A.Y 2008-09, it cannot again press for acceptance of RPM as most appropriate method. In rejoinder, the ld AR submitted that in A.Y 2008-09 as the assessee was not having any income and there was only brought forward losses to be set off having no effect on revenue or taxability, assessee accepted rejection of RPM by not carrying on litigation any further. However, that cannot prevent the assessee from objecting to adoption of TNNM in the impugned A.Y. The ld .....

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products. That being the case, the most appropriate method for determining the ALP of such transactions, in our view, is re sale price method. In this context reference can be made to Rule 10B(1)(b). On a perusal of the said provision, it is very much clear that the most appropriate method in this nature of transactions is the resale price method. In this context, the decision of ITAT Delhi Bench in case of Luxottica India Eyewear Pvt Ltd in ITA No.1115/Del/2014 dated 05.11.2014 requires conside .....

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the ALP. Department contested assessee s claim by contending that when the assessee himself has adopted TNNM as the most appropriate method in its TP study, it cannot turn around and argue for adoption of resale price method as the most appropriate method. After considering the submissions of the parties as aforesaid and keeping in view the decisions of other Benches of ITAT on the issue, the Delhi Bench of the Tribunal accepted assessee s claim for adopting resale price method by holding as un .....

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e stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the MAM in the TP report, then also it is not preclude .....

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of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the Ld.DR and also the observations of the AO and the Ld.CIT(A .....

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d that RSPM is the MAM by applying the following decisions of the Co-Ordinate Bench of the Tribunal. (i) In the case of Star Diamond Group NV Mumbai (ITA No.3923/Mum/2008), it is held as follows: 13. This finding in our humble opinion is wrong for the reason that the CIT(A) has adopted these very comparables, along with three others while arriving at the operating margins at Para 7.16 of his order. As the assessee is a trader, without value addition to the goods, we find force in the submissions .....

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uring the course of hearing, ld.DR also supported the method considered by TPO and referred to Para 2.29 of OECD price guidelines 2010 as stated hereinabove. On the other hand, ld.AR justified the RP< method adopted by it and also referred to order of TPO in the preceding AY as well as succeeding AY to the AY under consideration to substantiate that RPM is the most appropriate method to determine ALP. He submitted that the assessee made adjustment for marketing and selling expenses to the pro .....

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unrelated parties without any further processing. (iii) In the case of Danisco (India) Pvt.Ltd. vs. ACIT, Circle 10(1), New Delhi (ITA no.5291/Del/2010), it is held as follows: 22. Considering the above submissions we find that the assessee established in 1998 as a 100% subsidiary of Danisco A/S Denmark. Danisco India is engaged in the business of manufacturing and trading of food additives. The manufacturing business in respect of food flavours and the trading business is for products for falli .....

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eard to the assessee by the authorities below as well as their failure to examine the contentions and arguments of the assessee in this regard. Considering these grievances as discussed herein above by us in the arguments advanced by the parties/their submissions and having gone through the decision relied upon, we find substance in the submission of the assesse3e and thus we are of the view that it is a fit case to set aside the matter to the file of the Ld.TPO for his fresh consideration and d .....

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e method as commission payment; (iv) Frigoglass India P.Ltd. (ITA no.463/Del/2013), it is held as follows: We have heard the rival contentions and perused the material available on record. In our considered view, once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In this case except theoretical assertions and generalized observ .....

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he view that Assessee s methods of CPM and RPM respectively worked by applying appropriate comparables is to be upheld. Thus the ALP working returned by the assessee is upheld. The Assessee s TP grounds are allowed. (v) Textronic India Pvt.Ltd. vs. DCIT (ITA no. 1334/Bang/2010), it is held as follows: We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipment from its AE and resells them without .....

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ts from the AE and sells it without any value addition to the Indian customers. In such circumstances, we are of the view that the ratio laid down by the Mumbai Bench of the Tribunal in the case of L Oreal India Pvt. Ltd. (supra) would be squarely applicable to the facts of the assessee s case. In that event, the GP as a percentage of sales arrived at by the TPO in Annexure to the TPO s order insofar as trading activity of comparables identified by the TPO at 12.90%. The GP as a percentage of sa .....

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. In view of the above discussion, we direct the TPO to adopt RSPM as the MAM in this case. 44. On a perusal of the extracted portion from the order of the Coordinate Bench, it is very much clear that after considering a number of decisions on the very same issue from different Benches of the ITAT, it was held that in case of transactions related to purchase and sale of goods, RPM is the most appropriate method. The principles laid down by the Delhi Bench clearly applies to the facts of the pres .....

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analysis under the RPM and decide the issue accordingly after due opportunity of being heard to the assessee. 45. In view of our decisions in Ground No. 15, Ground No.16 has become infructuous, hence not required to be adjudicated. 46. As far as the issue raised in Ground No.17 is concerned, ld AR fairly submitted that the issue raised therein is an argument connected with ground No. 15 above. Hence, there is no need to adjudicate this ground as the issue was remitted to AO in ground No. 15. 47 .....

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